Deep Spending Cuts Pose a New Threat to US Economy

WASHINGTON (AP) - Just as the U.S. economy is making progress despite Europe's turmoil, here come two new threats.

A congressional panel is supposed to agree by Thanksgiving on a deficit-reduction package of at least $1.2 trillion. If it fails, federal spending would automatically be cut by that amount starting in 2013.

Congress may also let emergency unemployment aid and a Social Security tax cut expire at year's end.

Either outcome could slow growth and spook markets.

Analysts are concerned, but most aren't panicking.

Many say the economy and markets can withstand the blows. That's because Congress or the Federal Reserve could take other steps next year to lift the economy. And investors expect so little from the congressional panel that they're unlikely to overreact whatever it does.

"There's no doomsday scenario in reducing government spending," said David Kelly of JP Morgan Funds.

The 12-member bipartisan panel, or supercommittee, was created in August to defuse a political standoff over raising the federal borrowing limit. If it can't agree on a deficit-reduction plan, automatic spending cuts would hit programs prized by both parties: social services such as Medicare for Democrats, defense for Republicans.

The panel appears to be deadlocked.

Economists say a stalemate makes it harder for Congress to extend the Social Security tax cut and unemployment benefits. On the other hand, if the supercommittee does forge a deal, it might include an extension of those benefits. Or it could at least clear the way for an extension later.

The Social Security tax cut gave most Americans an extra $1,000 to $2,000 this year. Unemployment benefits provide about $300 a week. Most of that money quickly and directly boosts consumer spending, which drives the economy.

By contrast, an expiration of those benefits could cut growth by about three-quarters of a percentage point, economists say. Throw in other cuts, like those passed in the August debt deal, and all told, federal budget policies could subtract 1.7 percentage points from growth in 2012, according to JPMorgan Chase and Moody's Analytics.

Given the tepid economy, such a hit could be damaging.

"It would be very difficult for an economy that's doing well to digest, let alone one that's barely growing at potential," said Ryan Sweet, an economist at Moody's. "That could unwind a lot of the improvement we've seen so far."

The economy grew at an annual rate of 2.5 percent in the July-September quarter. Some analysts fear it could fall below 2 percent next year, especially if the emergency unemployment benefits and Social Security tax cuts aren't renewed.

The U.S. economy faces other threats, too - from persistently high unemployment to Europe's spreading debt crisis, which could hasten a recession.

If the automatic spending cuts take effect, the defense budget could be cut by nearly $500 billion over nine years. Some contractors are nervous.

Wes Bush, CEO of Northrop Grumman, has told analysts that the company is bracing for spending cuts.

"It's certainly going to be a more challenging environment" next year, he said.

Another wild card: Some investors fear that the supercommittee's failure would spark fresh downgrades of U.S. debt. Standard & Poor's downgraded the government's long-term debt in August. That contributed to a stock market plunge. It's possible that a deadlocked supercommittee would lead the two other major rating agencies - Fitch and Moody's - to follow suit.

Yet S&P's downgrade did little to tarnish U.S. debt. Treasury prices rose, and yields fell. Bond investors still saw Treasurys as a super-safe investment. Federal borrowing costs actually declined.

"S&P showed that when a rating agency downgrades the best-known security in the world, it has little impact," Kelly said. The market for U.S. Treasurys is so broad, accessible and transparent that ratings downgrades don't pose much threat, he noted.

Kelly said Wall Street is unlikely to panic given that expectations for the supercommittee "are so low as to be subterranean."

Even so, some traders appear to be positioning for a shock. So-called "defensive" sectors of the stock market, like healthcare companies and utilities, which tend to retain their value in a weak economy, have been outpacing the S&P 500 index as a whole.

In the past month, the economy has shown surprising strength. Reports this week showed that manufacturers are producing more goods and consumers are spending more. The number of people seeking unemployment benefits for the first time is at a seven-month low.

Still, more than once since the recession officially ended more than two years ago, the economy has displayed vigor only to stumble again. High gas and food prices and Japan's earthquake sharply slowed growth in the first half of the year. Congress' debt-ceiling fight sent consumer confidence to recession levels.

Sweet thinks there's a good chance Congress will end up extending the Social Security tax cut. Partly on that assumption, Moody's foresees 2.6 percent growth next year. For this year, analysts generally estimate less than 2 percent growth.

Lawmakers could make other policy changes next year to energize the economy. The tax cuts enacted during the Bush administration, and extended in 2010, are set to expire after 2012. Republicans will push to renew them.

Some of the automatic cuts set to kick in in 2013 could be delayed or altered. That's particularly true if the White House or either chamber of Congress changes sides in 2012.

And some economists say the automatic spending cuts could actually boost confidence a bit: They would reassure the world that the U.S. government can make progress in shrinking its deficit.

Even so, the supercommittee seems likely to fall short of its goal to help reduce the federal debt load.

And there's more pressure to come.

Priya Misra, an analyst at Bank of America Merrill Lynch, estimates that Congress will need to find $2 trillion more in cuts by August 2013 to prevent another credit downgrade.

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May 28 2012 at 12:50 PM Report abuse rate up rate down Reply

It will be so strange if Americans still waste gasoline after all the cuts and increases are put in place.. Americans are so addicted to oil , natural gas, coal, nuclear , etc that they will never give them up even if they are starving ... Big Oil is so AAWWWESSSOMME, DUDES!

November 21 2011 at 3:46 PM Report abuse rate up rate down Reply

Stated in the article, "because Congress or the Federal Reserve could take other steps to lift the economy."
That means bailouts to the banks and big business. Been there done that.

November 21 2011 at 3:44 PM Report abuse rate up rate down Reply

We've had 3 years of spending increases, with money we don't have. What do we have to show for it? More debt. Our economy is still tanking. Spending is the problem. More spending won't fix that problem.

November 21 2011 at 1:14 PM Report abuse +1 rate up rate down Reply
1 reply to Beautiful's comment

beAUTIFUL,, WE STILL WASTE GASOLINE, HEATING OIL, NATURAL GAS, COAL, ETC... just because they are not government stuff.. then it is hunkydory to contniue wasting energy, huh?? When will you ever understand that our economy needs to stretch energy so that we can hire more workers that will pay taxes... If we continue to waste energy, it is too impossible to rehire workers .... We had been outsourcing jobs largely becuase of our wasteful energy habits.. Businesses find cheaper labor overseas because workers do not drive V8 cars there... You see any connection ??? So pls stop badgering our goverment who has its plate so full ... You start stay home and park your gas guzzler !!

November 21 2011 at 3:50 PM Report abuse rate up rate down Reply

We must cut down on our reliance of fossil fuel with more solar mirrors that is most powerful solar idea around.. We are still not interested about solar mirrors.. I just dont know why? People do not really grasp the concept of solar mirrors and what it can mean for our economy and our energy supplies.. People are still thinking that photovoltaics is the only solar idea around ... This is not true.. People dont understand what a Btu is... or a therm is ... All they understand is watts... Why arent we explaining what a Btu mean and how mirrors can generate Btus we need for heating homes ... Heating homes is very expensive and solar energy can heat homes , too. We just dont understand it at all. So goes our economy downhill!!

November 21 2011 at 11:27 AM Report abuse -1 rate up rate down Reply

The supercommittee is nothing but just a bunch of spenders fighting over what and where to spend... I am more worried about our economic growth than what that bunch of spenders are deadlocked about.. Our economy is not growing simply because of limited supplies of energy which means that energy prices will spike .. This is the most threatening issue , I think.. Our economy just cannot grow enough to help balance our govenrment budgets simply because of lmited energy supplies.. Green energy is not doing much lately ... Solar producers are fantasizing that they can sell a watt for three bucks apiece which is unrealistic.. and their products are inferior .. They ought to be making mirrors instead of silicon junk..

November 21 2011 at 11:23 AM Report abuse +1 rate up rate down Reply


November 21 2011 at 2:36 AM Report abuse +1 rate up rate down Reply

think this article is inconclusive, the biggest threat to this economy and the worlds, is the price of oil because of speculators

November 20 2011 at 7:41 PM Report abuse +1 rate up rate down Reply

It took three generations for socialism to overtake the world... Now we are moving from Apathy to Slavery... If will take two or three more to finish the job if that long... Assimilation is inevitable.. resistance is futile.. It is creepy when life imitates art... How sureal isit to be be assimilated by the BORG.. (B)arack (O)bama's (R)evolutionary (G)uard...
The Wall Street Protesters sure have a lot of similarity to Hitler's street gangs.. He vilified the Jews as the cause for Germany's economic problems.. He used violence to centralize power.. Voices that spoke out against were slandered and disappeared.. HMM.. Does history repeat itself ???

November 20 2011 at 7:31 PM Report abuse +1 rate up rate down Reply
1 reply to dwight's comment

Bigotry is bigotry, regardless of the specific subjects the bigot's target at any given time.

November 21 2011 at 3:42 PM Report abuse rate up rate down Reply
Holli, Chaney

Not as much as huge tax increases threaten the economy. BUT the biggest threat to the Economy is keeping this debt growing the way it is.

November 20 2011 at 7:55 AM Report abuse +1 rate up rate down Reply